Every mortgage company under sun claims to have the lowest rates. But who really has the lowest rates? It’s hard to tell with all the clever ads and fast talking salespeople, but I will break down how it really works in this quick article:
Here’s how it usually ranks: in order from highest rates to lowest rates:
1. Big banks (Bank of America, Wells Fargo etc)
2. Mortgage Servicing Companies (Mr. Cooper, etc)
3. Direct Lenders/Retail (Quicken Loans, loanDepot, American Financial Network etc)
4. Credit Unions (Navy Federal, Schools First etc)
5. Mortgage Brokers/Wholesale Brokers
There are several reasons why the big banks and retail direct lenders charge more:
1. Familiarity/Comfort – Big banks can get away with charging more because some people will always just feel more comfortable doing business in the bank branch atmosphere.On top of them being aware that they can charge more for this service, they also need to charge more to cover the large infrastructure expenses associated with running a nationwide brick and mortar operation.
2. Psychological impression – Mortgage servicing companies charge a premium because most consumers believe that they will get a better deal because they are staying with their existing company.The truth is that the company you are currently making your mortgage payment to is most likely a collection company who is working on behalf of the actual holder of your mortgage which is usually Fannie Mae, Freddie Mac, or Ginnie Mae. In fact, I worked at a mortgage servicing company who I won’t mention here and I was floored when I learned that we were given two rate sheets. One for our existing customers and another rate sheet for new customers who management considered more likely to shop around (a full .25%-.375% higher rate).
3. Name recognition – Large direct lenders spend millions of dollars every month to build up a brand name for themselves including expensive television ads, online campaigns, even going as far as to purchase entire sports arenas to build brand awareness.In addition to this, they run very inefficient operations with low skill level staff which racks high training and attrition costs.They need to make up for this by charging very high margins to pay for these expenses putting their rates significantly higher than the wholesale rates that are available to savvy rate shoppers.
How to compare your offers to ensure you are getting the best deal:
1.Obtain a Loan Estimate (LE).It’s a three page document required to be sent to you within 3 days of your application date.
2.Look specifically at these line items: D and J.“D” is your total cost to obtain the loan without any prepaid items and “J” is any credit being issued to you.Ignore the other figures on this document for the purposes of comparing one offer against another. D minus J is the total you are spending in fees to obtain the offered interest rate.
3.Use the same rate for all lenders you are comparing.If you are comparing a 4.5% at Lender A, then make sure you are comparing at 4.5% and Lender B and C, then it’s a simple as using D minus J.and finding who is offering the best terms at that given rate.
4.Make sure that all the lenders you are comparing are using the same criteria to generate your offer including: credit score, estimated home value, and loan purpose (purchase/refi/cash out).